Osborne confirms pay and jobs pain as growth slows

 

The chancellor said much of Europe was heading towards recession as he pledged to do "whatever it takes" to protect Britain and keep interest rates low

Chancellor George Osborne has said public sector pay rises will be capped at 1% for two years, as he lowered growth forecasts for the UK economy.

The number of public sector jobs set to be lost by 2017 has also been revised up from 400,000 to 710,000.

Borrowing and unemployment are set to be higher than forecast and spending cuts to carry on to 2017, he admitted.

For Labour, Ed Balls said the figures showed the chancellor's economic and fiscal plans were "in tatters".

Outlining his plans to MPs, based on economic forecasts from the independent Office for Budget Responsibility (OBR), Mr Osborne told MPs the UK economy was now forecast to grow by 0.9% this year - compared with 1.7% forecast in March and 0.7% next year, down from the 2.5%.

He said the eurozone crisis, a hike in global commodity prices and a new assessment that the UK's economic boom was bigger and the bust deeper than previously believed was to blame.

Borrowing was falling and debt would come down but "not as quickly as we wished". In 2011-12 borrowing is now forecast to be £127bn - up from £122bn forecast in the Budget and, over five years, the government is expected to borrow £111bn more than predicted in March.

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But he said, because debt interest payments had dropped, the government would be spending £22bn less over this Parliament on that than predicted.

The OBR forecast that unemployment would rise from 8.1% this year, to 8.7% next year - before falling to 6.2% by 2016. Its earlier prediction that a squeeze on the public sector would mean 400,000 job losses over five years has been nearly doubled, to 710,000 - as a result of extra spending cuts pencilled in for 2015-16, and 2016-17.

Chief Secretary to the Treasury Danny Alexander later told BBC Newsnight that the government did not yet know where the bulk of the £30bn additional cuts - £1.2bn of which is expected to come from changes to tax credits - would come from.

He said: "We haven't decided where those cuts will come from. It doesn't have to be found quickly, that is in 2015-16 and 2016-17. In good time, well before the next election, we will set out precisely what the measures are to deliver those additional savings in the next Parliament."

The chancellor conceded he would not now be able to eliminate the structural deficit and see national debt falling by 2014/15 as had been predicted. The structural deficit is now predicted to be eliminated by 2015-16, pushing it beyond the next general election.

'Debt storm'

While the OBR had not forecast a double dip recession - as the economic think tank the OECD did on Monday - the chancellor warned that if the rest of Europe went into recession, "it may prove hard to avoid one here".

But he said the government would meet its budget rules.

KEY POINTS

  • Growth forecasts for UK economy cut 0.9% this year and 0.7% next year
  • Borrowing forecasts revised up - an extra £111bn to be borrowed over five years
  • Pay cap of 1% for public sector workers once two-year pay freeze ends
  • Unemployment to rise from 8.1% this year to 8.7% next year
  • More public sector jobs forecast to go - 710,000 over five years
  • £40bn "credit easing" scheme to underwrite bank loans to small firms
  • Working age benefits will be uprated by 5.2% in line with September's inflation rate
  • Basic state pension to rise in line with inflation by £5.30
  • Other increases in tax credits will not go ahead in 2012-13
  • £5bn plan to improve national infrastructure over three years.
  • £1bn scheme to subsidise work placements for the young unemployed
  • £500m housebuilding plan in England
  • January rise in regulated rail fares to be capped at 6.2%, not 8.2%
  • Doubling of free childcare places for deprived two-year-olds to 260,000 in England
  • 3p fuel duty rise due in January to be delayed or frozen
  • Bank levy to be increased

Mr Osborne said: "Much of Europe now appears to be heading into a recession caused by a chronic lack of confidence in the ability of countries to deal with their debts.

"We will do whatever it takes to protect Britain from this debt storm while doing all we can to build the foundations of future growth."

BBC News Channel chief political correspondent Norman Smith said many would be surprised by the scale of the pain ahead, with difficult austerity measures planned even after the next election and a big squeeze on living standards, with the OBR predicting no significant rise in disposable income before 2014 and a post-war record fall in incomes this year.

Among money-saving measures outlined by the chancellor were a 1% cap on public sector pay for two years, once the current two-year pay freeze ends from 2013 - Mr Osborne said the government "cannot afford the 2% rise assumed by some government departments thereafter". That would save more than £1bn by 2014-15, he said.

He acknowledged a 1% cap was "tough" but said many public sector workers would be helped by "pay progression" - annual increases in salary grades - even when pay was frozen.

Plans to raise the state pension age from 66 to 67 would be brought forward by eight years to 2026, to save £59bn in the long term.

The child element of child tax credit and the disability elements of tax credit will be uprated in line with inflation, but other tax credit increases will be restricted.

But in April there will be a £5.30 increase in the basic state pension to £107.45, in line with the 5.2% inflation rise in September.

Pensioners receiving pension credit will also benefit from an increase worth £5.35 and "working age" benefits would also go up in line with the higher inflation figure - contrary to earlier reports - which he said would be a "significant boost to the incomes of the poorest".

Fuel duty

Other announcements included an increase in the bank levy to 0.088% from 1 January and a 50% discount for social housing tenants who want to buy their own home - the proceeds of which would go towards building new affordable homes.

Mr Osborne also went through a series of schemes aimed at boosting the UK's flagging economy.

Start Quote

His economic and fiscal strategy is in tatters”

End Quote Ed Balls Shadow chancellor

These include a £20bn national loan guarantee scheme for small businesses, a £40bn "credit easing" scheme to underwrite bank loans to small businesses, plans for £5bn spending on big infrastructure projects over three years - with 35 road and rail schemes identified, £400m fund to kick start housing projects, an extended business rate holiday for small firms and an extra £1.2bn for schools in England.

Rail fares, and fares for the Tube and London buses, will be capped at inflation plus 1% while the fuel duty rise for January has been axed and a planned 5p rise in August limited to 3p. Free nursery care targeted at two-year-olds from poorer families will be extended to 260,000 toddlers and Mr Osborne confirmed a £940m scheme to target youth unemployment by subsidising work placements in the private sector.

Overseas aid will be adjusted as it is currently on track to surpass the government's commitment to raise it to 0.7% of GDP, which Mr Osborne said could not be justified in the current circumstances.

But for Labour, shadow chancellor Ed Balls said the figures showed the "truly colossal failure of the chancellor's plan".

"Let's be clear what the OBR has told us today: Growth flatlining, down this year, next year and the year after. Unemployment rising, well over £100bn more borrowing than the chancellor planned a year ago - more borrowing that the plan which the chancellor inherited at the last general election.

"As a result his economic and fiscal strategy is in tatters."

On the issue of public sector pay, TUC general secretary Brendan Barber said: "The chancellor's refusal to back a Robin Hood tax, and make nurses pay instead, speaks volumes about his values.

"Public servants are no longer being asked to make a temporary sacrifice, but accept a permanent deep cut in their living standards that will add up to over 16% by 2015 when you include pay and pension contributions."

 

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  • rate this
    0

    Comment number 573.

    500.Thick as Shigpit
    I do not know how you can say such a thing I was talking to two brothers 1 electrician and 1 a plumber they where grumbling on how much tax they paid to keep the public sector when I asked where thet were working they said the new headmasters house from the local school there is a lot of private sector firms going to suffer

  • rate this
    0

    Comment number 572.

    1L19

    Couldn't have put it better myself.

  • rate this
    +1

    Comment number 571.

    539 Robbed Peter
    So you have paid in for 26 years, was that all you were taking out or were you banking on the quadrupling of the amount due to tax payers top ups? get real!

  • rate this
    +3

    Comment number 570.

    519. Ian_Mackenzie - Leave Vince in the Business Department but give him back his teeth. Ken Clarke needs to be made Chancellor or (my preference) bring back and promote Laws or how about a bit of cross party cooperation and bring in Darling.
    531. farkyss - Additionally Ed Balls was part of the team that caused the problem.
    527. bigmouth strikes again - Faster debt repayment but slower growth.

  • rate this
    +2

    Comment number 569.

    fitz13
    there are no millionaires working in my hospital like there are in the cabinet. I would happily take a pay cap if I was on 100 grand or thereabouts.
    Try suggesting something sensible or with some kind of relation to the discussion.

  • rate this
    -1

    Comment number 568.

    its seems to me that we are now borrowing more money than the last Government, please make sure those Government ministers who go onto Question Time stop coming up with the Diatribe about 1 in 4 pounds

  • rate this
    +2

    Comment number 567.

    Public sector jobs are service oriented. As such they naturally grow in number as the public becomes ever more accustomed to that which they provide. Since they contribute little to the creation of the weatlth of the nation, a point (usually in times of economic downturn) is reached where their value must be judged.

  • Comment number 566.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    +1

    Comment number 565.

    537.theoldgoat
    "Why is this turning into a competition for who is worse off?"

    Because of perceptions = view point. covered it in 143 if you wish explination.

  • rate this
    +6

    Comment number 564.

    I agree with #547. How come those on benefits who do not work at all are to receive higher rises than those who at least get off their backsides and go to work to earn a living. And no I am neither on benefits nor a public sector worker and I haven't had a pay rise in at least 3 years!!

  • rate this
    +4

    Comment number 563.

    #38 "Just like to pint out to a few responders"

    I'll have a Brown ale thanks very much..

    G

  • rate this
    0

    Comment number 562.

    Never fear , Merkel is on her way ...............

  • rate this
    -55

    Comment number 561.

    Public sector pensions should be capped and people should pay more into them rather than the taxpayer being fleeced. I totally agree that the public sector needs reformed no longer can people in the Private Sector pay for public sector as well as being expected to save for their own pensions.

    Well done George Osborne. Public sector costs should be reduced.

  • rate this
    -4

    Comment number 560.

    This country has been living beyond its means for years. It's payback time. The private sector found this out 3 years ago. The public sector is finding it out now.
    We can do it the hard way (Osborne- deficit reduction as determined by govt), or the hard way (Balls- a spending boom followed by deficit reduction as determined by the markets).
    There is no easy way. Sorry.

  • rate this
    -9

    Comment number 559.

    As public sector workers get a pension worth +30% of salary, they are lucky to be getting any sort of pay rise.

    For years they wanted pay parity with private sector workers - well now they have got it.

    Sometimes you have to be careful what you wish for.

  • rate this
    +8

    Comment number 558.

    @549 PNorth, no I'm afraid its you who just doesn't understand. Try actually reading the Hutton Report instead of believing the bile in the Daily Mail.

  • rate this
    +1

    Comment number 557.

    The government is clearly trying to get public sector staff close to retirement to leave early. Each year they stay in post their pension increases by 1/80th of salary, but their salary decreases in real terms by 5%, 1/20th. This means that each year they stay, their pension decreases by 3/80ths, compared to what they would get by leaving immediately, since the pension is index linked.

  • rate this
    -7

    Comment number 556.

    Maliman – 398
    So 300,000 fewer Public Sector Workers means less tax collected.
    So if we employ a million extra PS workers & pay them all a million pounds, the tax collected would sort out all our problems.
    I didn’t realise it was so easy, or am I missing some basic maths here?

  • rate this
    +80

    Comment number 555.

    I hear all the complaints about public sector pay but imagine a UK with a privatised NHS, fire and police services. Most of these people give their entire working life to public service and that should very well rewarded. I don't grudge these workers a penny. Using tax payers money to re-capitalise the banks who then don't lend it is a huge scandal. Shame on the Tories, but typical of them.

  • rate this
    +1

    Comment number 554.

    541.
    Paul
    Just now

    319. hizento
    Public sector work are not profit orientated unlike private sector. If all public sector jobs were handed over to private sector all public services would simply be unaffordable."

    Which is why it's cheaper for us to get Biffa to collect our business refuse than it is for us to pay the council to do it.

    Oh, wait...
    ///
    Yes you forgot healthcare

 

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